Download The impact of the economic and financial crisis on Africa

THE IMPACT OF THE ECONOMIC AND FINANCIAL
CRISIS ON AFRICA: CHALLENGES AND
OPPORTUNITIES FOR THE FUTURE.
PAPER PRESENTED ON BEHALF OF THE PRIVATE SECTOR IN
BOTSWANA TO THE 10th REGIONAL SEMINAR OF ACP-EU
ECONOMIC AND SOCIAL INTEREST GROUPS,
GABORONE, BOTSWANA.
29 JUNE, 2009.
BY
DR. HOWARD K. SIGWELE
EXECUTIVE DIRECTOR, DELTA DAIRIES (PTY), BOTSWANA.
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BACKGROUND
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The expansionary monetary and fiscal policies coupled with sub-prime
and speculative lending and weak financial regulatory systems in the
industrialized world, especially the US, have led to the global financial and
economic crisis (Laborde and Torero, IFPRI, 2009). Low interest rates and
high public expenditures in industrialized countries have contributed to the
crisis.
•
The global financial crisis in the industrialized world is mainly through
financial integration/linkages whilst in the developing world it is through
trade, foreign direct investment (FDI) flows, tourism revenue and
remittances. These developments and transactions have together led to
the current global economic recession and financial crisis!
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An economic recession occurs in a country/ region or world when there is
a decline in economic growth or Gross domestic product (GDP) for at least
two consecutive quarters as well as fall in employment,
industrial/manufacturing out, retail sales, per capita income, etc. In short,
an economic recession is characterized by a declining demand for
raw materials including minerals, products and services. It is reported
that since World War 11, there have been about eleven global economic
recessions (Srinivasan, et al, 2005)!
Global economic growth is expected to decline from about 3.5 percent in
2008 to 0.5 percent in 2009. It is also possible the decline in global
economic growth could be worse than currently forecast (IMF, 2009). The
worst economic decline is forecast in highly industrialized countries (US,
EU, Japan).
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Highly industrialized countries (where most developing countries send
their exports) are expected to register an economic growth of 1 percent in
2010 but there are still some uncertainties. These uncertainties are due to
the fact that the magnitude of the effects of the global financial crisis is still
not fully known and quantified due to several factors. For instance, there is
still uncertainty (including doubts) about how the world will respond to
current and planned country economic stimuli packages by several
developed countries!
There are, however, some encouraging positive but weak signs of
economic recovery globally possibly due to the response to various stimuli
packages (i.e gains in the stock market, construction and housing
industry, stability in consumer spending, slowing down of joblessness,
etc). A rebound of economies of industrialized countries is critical for
Botswana’s exports and economic growth.
Growth in the emerging and developing countries is also slow but still
positive and higher than that of highly industrialized countries. Economic
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growth is forecast to decline from a high of 6.5 percent in 2008 to 3.25
percent in 2009. It is also expected that in 2010 economic growth in these
countries could rebound to about 5 percent.
For commodity exporters in Africa, Latin America and the Middle East,
economic growth is expected to decline from 4.5 percent in 2008 to about
1 percent in 2009. Botswana as primarily an export-dependent economy is
adversely affected by the economic downturn. Already the external
demand for its minerals (diamonds, copper and nickel) has declined
drastically.
Countries in the emerging economies including China and India are
expected to experience a decline in growth from about 8 percent in 2008
to about 5.5 percent in 2009.
Besides declining economic growth, the current global recession has other
negative effects on the world. These effects include job losses with
unemployment rate above 5 percent in most industrialized countries whilst
in many developing countries, the figure is above 20 percent.
Manufacturing/industrial output and retail sales are declining whilst
disposable incomes for households have also worsened
IMPACT ON BOTSWANA
o Botswana as an open-economy and also integrated into the global
commerce, has had a share of these negative impacts. Whilst the
magnitude of the decline of the country’s Gross domestic product (GDP)
due to global economic recession is not yet fully quantified and made
public, economic growth is expected to drop significantly due to a fall, in
particular, of mineral export revenue. Central Statistics Office (CSO) is
currently carrying out a quarterly survey on employment and employees
and the results are expected later this year
o The mining sector, especially the diamond subsector, constitutes the
backbone of the Botswana’s macro-economy as public revenue from the
industry is used to provide critical social services (health, education,
water, infrastructure, social safety nets, etc) and investment capital for
diversification.
o The ongoing global recession, in particular, is going to affect the country.
Below is a brief summary received from sectors about the impact of the
crisis.
MINING SECTOR
 A decline in export demand for and prices of her minerals( diamonds,
copper, nickel, ) will lead to reduced public revenue and company sales,
loss of jobs, lower household expenditure and savings, reduced intersectoral income and expenditure linkages, etc. Mineral revenue accounts
for about 40 percent of Botswana’s Gross Domestic Product (GDP) and
over 40 percent of Government total revenue.
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
Unlike in previous years, mineral revenue which normally is the main
source of the public revenue and accounting for about 40 percent of total
government revenue, during 2009/10 fiscal year, this source will instead
contribute about 28 percent of total public revenue whilst customs and
exercise revenue will be the largest source of government total revenue
accounting for about 29 percent.
The decline in the contribution of the mineral sector is mainly due to the
fall in diamond external prices caused by global recession or a reduction
in external demand.
•
During 2008/2009, diamond export sales are expected to decline by 50
percent. Diamond sales account for the bulk of mineral revenue to
government. Similarly, other minerals are also facing a decline in sales.
The decline in mineral export earnings demonstrates the link between
Botswana’s economy and global commerce. A recovery in the global
economy to revive the external demand for minerals is therefore very
critical for the country’s economy.
•
Currently output/production cuts, staff retrenchment and lengthy plant
shutdowns characterize the mining sector. Several households are directly
dependent on factor income from mining sector via their members who are
employed in the industry. Loss of jobs in the mining sector means
loss of household income or purchasing power and limited
economic activity in the mining areas and surrounding villages!
CONSTRUCTION SECTOR
o Whilst government has provided funds for capital formation (roads,
schools, health facilities, dams, etc) during 2009/10 to benefit,
among others, the construction sector, the deferral of some
development projects due to budgetary constraints, will adversely
affect the growth of this sector and reduce employment
opportunities in it. A budget deficit forecast for 2009/2010 is mainly
responsible for the deferral of some development projects.
o It is, however, gratifying, at least in the short term, that government
has been able to secure external loans which will help to finance
public expenditure and possibly enable the construction to benefit
also.
o Limited access to finance domestically from banks will further
reduce the potential for the construction sector to contribute
towards capital formation and additional employment creation. In
general, access to finance in Botswana is one of the major
challenges facing the private sector.
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o Like in the mining sector, reduced demand for construction services
due to lower per capita income, etc, has also led to loss of jobs in
the industry. The construction industry is one of the largest sources
of employment in the country especially for less skilled people.
MANUFACTURING SECTOR
o The continuing decline in consumers’ purchasing power is reducing the
demand for manufactured goods (clothing, food, household items, building
materials, etc.). The food and cement packaging industries are also
experiencing a down turn.
o Exports of manufactured goods (textiles, clothing, floortiles, etc) to other
parts of the world have also declined due to lower consumer demand.
o Manufacturing of timber products, light steel trusses and school furniture is
facing a decline due to lower demand.
o A decline in the manufacturing sector has also led to job losses and a
reduction in additional job opportunities.
FINANCIAL SECTOR
o Unlike in other countries, the financial sector/banking industry in Botswana
has not been affected by sub-prime and speculative lending as is the case
in some industrialized countries. The country’s financial regulatory system
is still strong and transparent, thanks to the oversight role of the Bank of
Botswana.
o However, with falling demand due to low purchasing power and job
losses, we expect banks to exercise more caution in their lending to the
private sector (mining, manufacturing, construction, transport, hospitality,
housing, etc) in order to avoid/minimize losses or asset impairment.
Similarly, the slowdown in external trade will also lead to a possible
decline in providing trade finance to businesses.
o The growth rate in the banking sector in 2009 will be lower than that of
2008 due the economic and financial crisis.
TOURISM/HOSPITALITY SECTOR
o The tourism sector is one of the major contributors to the country’s
economy or Gross Domestic Product. Like other industries, this sector is
also adversely affected by the current global economic crisis.
o Hotel reservations have dropped with occupancy rate expected to decline
by 35-40 percent. Similarly, travel and tour operators expect their
business/turnover to drop by 35 percent.
o Given the existing income/expenditure linkages between the tourism
sector and other industries including households, a decline in tourism
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revenue also adversely affects food security, purchasing power and
potential for expansion.
FOREIGN DIRECT INVESTMENT
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Foreign direct investment (FDI), an important component for diversifying
the country’s economy is also likely to be negatively affected by global
recession. According to Bank of Botswana, the mining and finance sectors
account for the largest share in FDI inflows which in turn are dominated by
Europe (Annual Report 2007, BOB). Indications are that FDI flows to
developing countries such as Botswana will decline.
As FDI inflows are critical for sustainable economic diversification, the
current global financial crisis coupled with declining commodity prices and
low profitability will negatively impact on Botswana’s economy. With
declining commodity prices and the perception of low profits in the
horizon, it might take time for Botswana to attract more FDI flows.
Interestingly, however, the recent FDI in the energy sector by China
together with domestic investment from a local bank is encouraging and a
positive development for Botswana.
REMITTANCES
• There are some Botswana citizens who are working outside the country
and remit money to their families for investment and consumption. Most of
the citizens working outside the country are in South Africa. The current
global financial crisis is likely to reduce employment opportunities for
those citizens working outside. A decline in remittances will also adversely
affect household income security.
ENERGY AND FOOD PRICES
• It is l encouraging that, on the import side, global food and energy prices
have declined and possibly stabilized to the benefit of, inter alia,
Botswana. Whilst the latest increase in fuel prices is a major concern,
hopefully the prices will stabilize to an affordable level for countries like
Botswana. Paradoxically, the increase in fuel prices could also be a
sign of economic recovery! Food and fuel imports are major expenses
for most low-income countries.
CHALLENGES AND OPPORTUNITIES FOR THE FUTURE
o As indicated earlier, the current global economic recession is neither the
first nor the last to rear its head in our economies. We can expect more of
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such adverse socio-economic developments given the different policies
and financial regulatory systems pursued by countries, and some times
lack of harmony in policy framework as well as their inherent
contradictions and polarized interest groups! Africa and Botswana should
prepare themselves for such adverse developments.
o Below are some of the challenges and opportunities that the private sector
is likely to face in future or when an economic recession prevails.
RESTORATION OF DEMAND.
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An economic recession is primarily characterized by a decline in
demand for goods and services. Specifically, the purchasing power of
consumers is adversely affected by an economic recession due to loss
of jobs, stagnant wages/salaries, contraction in the economy, decline
in export demand, etc. It is therefore critical that countries through their
governments and other stakeholders endeavour to restore demand
through expansionary public policies to improve purchasing power and
create/retain job opportunities.
The various economic stimulus packages by several countries are
partly aimed at restoring demand and this is a major challenge for
countries like Botswana where the government is the major player in
the economy. Coordinated and sustainable monetary and fiscal
policies at both national and global levels are critical to restore demand
given the increasing integration of economies.
Private sector initiatives such as target advertizing, customer
satisfaction or retention, maintaining quality, etc could also contribute
towards restoring demand.
Increasing Domestic Investment.
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Like other countries, Botswana has reduced the prime lending rate with
a view that investors could secure capital/finance from commercial
banks, etc to venture into sustainable and yet competitive production of
goods and services.
A decline in the prime lending rate by the Central Bank is aimed at
reducing the cost of capital for the benefit of the private sector.
Encouraging domestic investment in the face of declining demand due
to recession is a challenge that Botswana like other countries will have
to face.
As for FDI flows into Botswana it is likely that these will also be
negatively affected due to the global economic downturn, low
commodity prices and possibly the uncertainty about recovery.
Improving Access to Trade Finance
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
Access to finance in Botswana by the private sector has always
remained a major challenge (FAP, 1982; FIAS Report, 2004). Even
with programmes like the Citizen Entrepreneurial Development Agency
(CEDA), local companies especially small, micro and medium
enterprises (SMMEs) still struggle to access working/trade finance due
to some stringent requirements by commercial banks. Evidently, CEDA
assist firms with capital finance but accessing additional working
capital for firms has remained a challenge.

It might be opportune and appropriate for the ACP-EU cooperation to
consider introducing a private-sector friendly financial scheme in ACP
members/countries for their local firms and SMMEs to benefit in order
to diversify the economy and contribute towards poverty reduction in
line with the UN Millennium Development Goals (MDGs).

Previous and current ACP-EU projects have mainly benefited the
public sector for the provision of social services (education, health,
water, etc), infrastructure, research and development, natural resource
management whilst the private sector has not been comprehensively
and specifically targeted for assistance. As the private sector is also
critical for the transformation of ACP economies including Botswana,
this important regional seminar is strongly urged to consider
establishing an accessible and long-term financial scheme/programme
for SMMEs and other firms in the private sector.
Diversification of economy, exports and destinations.
 Botswana’s economy is not satisfactorily diversified while exports
(diamonds, copper, nickel, textiles, clothing, beef, etc) are few and
dominated by minerals .Further; minerals are not fully beneficiated to
increase domestic value.

Similarly, the country’s export markets are mainly the EU and the US
and yet with increasing per capita incomes in many parts of the world
including Asia, Latin America and others, it are in the interest of
Botswana that exports and their destinations are diversified to
minimize risks and reduce dependency on few markets. The current
economic recession should provide an opportunity for the country to
diversify her exports including sources of imports (food, raw materials,
machinery, etc).

The formal sector has to date received more support for the country to
diversify and generate additional job opportunities to reduce poverty.
The informal sector, sometimes referred to as the second
economy/unregulated sector, has the potential to diversify the
economy and contribute towards income and food security through
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employment. In many developing countries, this sector is one of the
key sources of employment and output (UNU, 2006). The current
economic recession should therefore offer Botswana an additional
opportunity to critically review the informal sector/second economy with
a view to designing sustainable policies and programmes for it to
develop and contribute to the objectives of the country.
Improving Productivity and Competitiveness through an increase in Research
and Development (R&D).
 An economic and financial crisis provides a golden opportunity for a
country and its private sector to review policies and programmes aimed at
improving productivity and competitiveness. In a fast and changing but
integrating global economy, it is critical that countries and companies
constantly improve on their productivity and competitiveness to minimize
the adverse effects of economic and financial crisis. Cost and quality
competitiveness, and productivity are central to a company’s sustainability
and profitability.
 In Botswana both government and the private sector should therefore use
this opportunity to “re-engineer” their organizations and firms to invest in
high levels of capital and labour productivity to face future competition
globally. In this regard, current programmes and the existing Hubs in the
country on agriculture, education, innovation (science and technology),
diamond and health should be constantly reviewed and resourced to
improve productivity and competitiveness.
 Botswana, like other ACP countries, can take leaf from the relatively high
allocation of funds from the US economic stimulus that are allocated to
research and development(R&D) to improve productivity and
competitiveness through science, technology and skills! There is no
shortcut to sustained productivity and quality improvements to outwit one’s
competitors.
Strengthening Financial Regulatory System
 Whilst our financial system has not been affected by subprime and
speculative lending that has contributed to the current global financial
malaise, the ongoing economic recession should provide an opportunity
for Botswana and the Bank of Botswana, in particular, to review its
financial regulatory system with a view to making it air-tight to prevent
subprime lending and its undesirable effects.

There is no doubt that Botswana through BOB has prevented a potential
crisis that could have worsened the negative effects of the global
recession by, inter alia, increasing the number of toxic assets in the
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companies’ balance sheets! Toxic assets are financial assets like
mortgaged property that have significantly lost value due to unfavourable
economic and market conditions. These assets have blighted balance
sheets of several firms and banks, especially in some industrialized
countries.

Other countries including industrialized countries are currently reviewing
their financial regulatory systems to avoid future subprime lending and its
attendant negative effects. The UN has also assembled a group of experts
to advise members about adopting and implementing a comprehensive,
transparent and effective international financial regulatory system in order
to minimize the adverse effects of global financial crisis.
CONCLUSION
 This paper has indicated how the ongoing global financial crisis is
affecting the economies of countries by reducing growth, trade and
investment flows, employment, remittances, etc.
 For developing countries, in particular, the global recession will reduce the
demand for their traded goods and investment inflows which in turn will
reduce growth to address poverty, industrialization and meeting MDGs.
 For Botswana, the paper has indicated that not only is its mineraldependent economy adversely affected by the global downturn, several
sectors face a decline in the demand for their products/services, output,
turnover and employment. Loss of purchasing power will also negatively
affect the ability of firms to grow or meet their business targets.
 Finally, the paper identified challenges and opportunities that the private
sector will need to address or take advantage of in future. These
challenges and opportunities are not only relevant to Botswana; other
developing countries are also directly or indirectly facing them. It is also
assumed the ACP-EU cooperation will help countries like Botswana to
address some of the challenges in order to help the private sector to grow
and contribute towards the realization of MDGs.
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